Tuesday, April 30, 2013

We now have some data confirming that China's anti-corruption drive (discussed here) is indeed responsible for at least a part of the recent economic weakness. Catering sales for large enterprises suddenly plunged earlier this year. Cutbacks in extravagant welcoming parties for central government officials, which drove down catering sales, also created a dip in the overall retail sales.

Source: Goldman

This anti-corruption directive has become more of a campaign against hedonism by public officials - and often less about the actual corruption.

Jing Daily: - The current campaign is the latest iteration of a long-running effort to combat “the illnesses – formalism, bureaucracy and hedonism” in the ranks of elite Communist Party leadership. Thus, the crackdown is not merely a utilitarian attack on China’s troublesome scourge of corruption itself, but also clearly focuses on the aesthetics of impropriety within the ranks of provincial officials.

Clearly, these are positive developments for China, but it's not known just how effective the anti-corruption efforts really are at this stage. With a weak court system that is often no more than a puppet of the Communist Party, it seems that officials continue to enrich themselves at public's expense. Only now they are being asked not to flaunt their wealth (which some wealthy people have been doing - see example). In fact activists who are pushing for disclosure of public officials' finances are being muzzled.

VOA: - Chinese authorities have detained eight anti-corruption activists over their participation in a signature drive that calls on central government officials to disclose their assets. Although there is widespread public support for officials to disclose such information, government efforts to promote the policy appear to be slowing.

Rights lawyers in Beijing say the activists have been taken into custody in recent days on suspicion of unlawful assembly.

As far as the impact on China's overall economy, most expect the effect of these measures to be short-lived. Given the somewhat superficial nature of the program, it's only a matter of time before China's wealthy officials begin spending again.

The ECB will have no choice but to ease monetary policy and possibly prepare for more drastic actions. The Eurozone is facing a growing risk of deflation - similar to Japan. Once the inflation rate in Japan fell below 1%, the external shock of the Asian currency crisis (late 90s) sent Japan into a deflationary spiral - something the nation is still dealing with today. The Eurozone may end up facing a similar scenario.

Danske Bank: - Europe is heading into a deflationary scenario if they don’t do anything to boost the money supply. This already looks very similar to what happened in Japan in 1996 and 1997.”

Source: CNN

Growth in consumer lending has come to a crawl as bank deleveraging continues. With retail credit growth curtailed, corporations have no pricing power. Signs of deflationary pressures are already in place.

Reuters: - EU leaders are already trying to shift away from the budget cuts that have dominated the response to the debt crisis since 2009, and the data will raise the specter of deflation as companies slash prices to entice shoppers.

Eurozone consumer loan growth (source: ECB)

Of course just like Japan, the Eurozone may face rising public sector debt, as austerity is put on the back burner. In fact many in Europe now blame the austerity drive by Germany for the deflationary risks the region currently faces.

Business Spectator: - Eurozone divisions over austerity policies championed by Germany have deepened as Italy's new government joined France in demanding a change of direction for the crisis-hit bloc.

Italy's new centre-left Prime Minister Enrico Letta told parliament on Monday that the country was "dying from austerity alone", and France voiced optimism that the political tide was turning in favour of critics of austerity.

"In terms of growth policies, Francois Hollande will now have a stronger voice and be less isolated in Europe," France's minister for Europe, Thierry Repentin, told AFP.

Letta's direct challenge to the tough belt-tightening that Germany and its allies have advocated as the answer to the single currency zone's debt crisis follows criticism of the eurozone's direction from the International Monetary Fund.

Whatever the case, the ECB will have to act in order to avoid the dangers of a deflationary spiral, which could take the Eurozone years (or even decades) to exit. This article from the FT lists Draghi's possible actions this week, representing a fairly limited set of choices (rate cut, forward guidance, easing collateral requirements for banks to borrow from the Eurosystem, and outright purchases of debt linked to "small and medium sized companies"). Something will need to happen to prevent the Eurozone from looking increasingly more like Japan.

Monday, April 29, 2013

We've received a number of emails pointing to what looks like a slowdown in lending by US-chartered banks. The amount of loans and leases on balance sheets of US banks has stopped growing.

As in 2009 and 2011, some people are upset to see record levels of bank excess reserves that are not being turned into loans. These are deposits at the Fed earning 25bp and people are asking why banks are not lending more of this capital out.

But what exactly caused the loan growth on banks' balance sheets to stall? More precisely, what types of loan balances are no longer growing? It turns out that while commercial and industrial loans continue to grow - in fact accelerating - the growth in retail mortgage balances has stalled. And that's the explanation for the flat-lining of the overall loan balances (the first chart above).

"Aha", some economists would say. Banks are not extending as much credit in the mortgage space as they should, which is slowing down the economy. Those evil zombie banks...

The real answer however has to do with the wonderful world of "shadow banking". Why would banks want to keep all these mortgages on their books when they can blow them out to Freddie and Fannie, who in turn sell them to the market in the form of agency MBS (mortgage backed securities). And who are the buyers? The usual suspects of course - insurance firms, mutual funds, etc., as well as the biggest buyer of them all - the Fed. In fact the holdings of MBS on Fed's balance sheet just hit a record. Mortgages are simply making their way from banks' balance sheets onto the Fed's balance sheet in the form of MBS.

Source: FRB (unit = USD million)

The data from Freddie and Fannie confirms this trend, with the first quarter of this year showing the largest net MBS issuance volume in two years. As much as people don't like to think about it this way, Freddie and Fannie are the biggest "shadow banks" around.

The last time we had a spike in MBS issuance in early 2011, mortgage balances at banks declined, as banks did some "spring cleaning".

But what about loans that are not Freddie and Fannie eligible? Those should still be sitting on banks' balance sheets, right? Not exactly. The private side of shadow banking is now kicking into gear, particularly in the so-called jumbo loans (mortgages too large to qualify for the GSEs).

Inside Mortgage Finance: - The private-label market is "showing new signs of life," according to Standard & Poor’s, which predicted that banks are likely to increase their securitization of jumbo mortgages. In a report released late last week, S&P projected $14 billion in non-agency jumbo MBS in 2013. Redwood alone set a goal of issuing $7 billion in non-agency MBS this year and is on pace to exceed that volume, helped by a pending $425 million deal, its sixth of the year. PennyMac Mortgage Investment Trust is also aiming to issue a non-agency jumbo MBS in the Redwood mold in the third quarter of 2013.

The demand for fixed income product has manifested itself in the so-called "private-label" MBS, allowing banks to securitize mortgages that don't qualify for Freddie and Fannie. Once again, it's not about lending less - which is how some economists are reading the first chart above. It's about originating product, collecting fees, and then selling into the hot securitization market - public or private. And taking those loans off the balance sheet creates room to do it all over again (the "recycling" of capital.) As one banker put it, "I want to be in the origination and fee business, not in long-term warehousing ..."

Sunday, April 28, 2013

The public is often amazed at Washington's inability to solve problems. Some have attributed that constant impasse to polarization in Congress - with very little overlap in attitudes across the party lines. But is this truly something new or just more media hype?

The data seems to indicate that polarization is definitely sharper now than in the past and is particularly acute in the House of Representatives.

Here is the level of "ideological overlap" twenty years ago:

Source: Credit Suisse

And here it is now (notice the bump on the very right of the Republican Party):

Source: Credit Suisse

The US Senate is also more polarized than in the past but not nearly as strongly as the House. The question of course is whether this polarization level is unique or have the parties been this divided in the past? According to Voteview.com, the polarization is at record levels since at least the end of the Civil War - even in the Senate.

Furthermore, the number of so-called "moderates" in each party is near record lows.

Those looking for a quick resolution to the pressing budged problems, don't bet on it. Washington's perpetual impasse is here to stay.

The Washington Post recently published a story on Egypt's growing black market, which is rapidly replacing the "official" economy.

WP: - Egypt’s rapidly expanding black market for fuel — and for foodstuffs, other commodities and U.S. dollars — may be the most tangible illustration of just how badly the economy of this vast Arab nation is failing, two years after the fall of Hosni Mubarak.

The prices of most basic goods, like fuel and flour, have been fixed for decades, with Egypt pouring roughly a quarter of its GDP into a bloated and deeply inefficient national subsidy system each year.

As foreign reserves run dangerously low, access to fuel is becoming particularly critical. To prevent a complete economic collapse in Egypt, Libya has stepped in to give support until the long-awaited IMF loan is put in place. Libya is in effect providing an interest-free oil loan for a year as a stop-gap measure.

The officials told Reuters that Tripoli would supply Cairo with $1.2 billion worth of crude at world prices but on interest free credit for a year, with the first cargo expected to arrive next month.

Egypt's officials continue to emphasize that the IMF loan deal is just around the corner.

Egypt's Official Press: - The Governor of the Central Bank of Egypt (CBE) said that measures required by the International Monetary Fund (IMF) for Egypt to obtain a loan are normal and followed all over the world.

During an interview with CBC satellite channel on Saturday 27/4/2013, Hisham Ramez said that an agreement with the IMF to get the loan is about to be concluded.

The IMF loan has other dimensions because it opens the door for borrowing from other bodies, Ramez said.

But that could be wishful thinking. Egypt just suffered a major setback, as its key negotiator quit today.

Reuters: - A key Egyptian negotiator with the International Monetary Fund said on Sunday he has resigned as first deputy finance minister, in a potential blow to Cairo's prospects of an early IMF deal.

Hany Kadry Dimian has been the crucial point man in Egypt's protracted and so far fruitless negotiations to obtain a $4.8 billion loan needed to help combat a severe economic crisis.
...

Kadry gave no explanation for his decision to quit, first reported on the Egyptian dissident Rebel Economy blog, saying he would say more on Tuesday.

A senior European diplomat said his departure was not a good omen for Egypt's hopes of wrapping up a deal on the long delayed IMF loan next month, as the government has said it aims to do.

There has been speculation that Qatar will step in to help Egypt with a $3bn loan, but so far that support hasn't materialized. Furthermore, many Egyptians are uneasy with Qatar and view it as meddling in the nation's internal affairs.

According to official sources in Egypt, foreign reserves now stand at $13.4 billion, while foreign debt is at $38.8 billion (up 13% from previous year).

As summer approaches, the risks of violent civil unrest rise sharply. This year Ramadan will be in July, the hottest month of the year. Power outages are expected to be quite frequent and shortages of bread and fuel could become an issue. With Syria becoming the recent focus of mass media, Egypt's issues have not been widely covered. Yet in the near future, Egypt's woes present a major source of uncertainty in the Middle East.

Saturday, April 27, 2013

Emerging markets cyclical stocks have been trailing defensive shares for some time, as investors stay uneasy about global growth.

Barron's: - While the MSCI Emerging Markets Index has a price/earnings ratio of 10.3 times the next 12 months of earnings, the average "cyclical" stock, whose earnings are linked to the strength of the global economy, has seen its valuation fall to 9.6 times. The average "defensive" stock, meanwhile, has a P/E ratio of 15.1 times. The 5.5-point gap between the two is more than twice the average of 2.7 points since 1995, according to UBS data, and it's been at least that high for the last six months.

But now, in another sign of the "spring slowdown" (discussed here), US cyclical shares - which have been beating the market through most of 2013 - have underperformed in April.

Source: Ycharts (click to enlarge)

Similarly to emerging markets, US defensive share valuations have been quite lofty on a relative (and one could argue absolute) basis. Now this gap is widening further.

This is one of the reasons economists are so focused on China. The nation's growth and its impact on global demand for natural resources will be the key determinant of a number of cyclical shares' relative performance going forward. So far investors haven't been impressed.

Update: CS published an excellent chart showing how the latest upturn in the market was led by defensive shares.

In spite of some improvements in the US job markets, labor force participation continues to decline.

The seasonality is driven by higher labor demand during warmer months (construction for example) or student summer jobs

The traditional explanation of course is that people are discouraged by the lack of job opportunities and are simply "dropping out" of the labor force after having exhausted their unemployment benefits. But that's easier said than done. Most people need some sort of income to survive - so where does that income come from? A portion of the decline can be explained by households with two incomes going to one. But that's by no means all of it. Let's explore some recent trends that may explain what's really going on.

1. One common explanation is older workers retiring earlier and dropping out of the workforce. There is some anecdotal evidence for early retirement but the data doesn't support it. While participation rate by workers 55 years and older is not growing at the rate it did during the boom years, it's not declining either - which means it can't explain the declines in the chart above. Many people simply can't afford to retire.

2. Another explanation is that young people who can't find work are going to school. This trend is definitely contributing to the reduction in the overall participation rate. And the source of "income" for this group is of course the federal government in the form of student loans. Government-owned student loan balances continue to rise, as people "wait it out" at school while accumulating massive debt.

3. Another source of falling "official" employment participation is the unregistered workforce, as more people get paid "under the table". Indeed the underground economy is estimated to be at $2 trillion per year.

CNBC: - The shadow economy is a system composed of those who can't find a full-time or regular job. Workers turn to anything that pays them under the table, with no income reported and no taxes paid — especially with an uneven job picture.

"I think the underground economy is quite big in the U.S.," said Alexandre Padilla, associate professor of economics at Metropolitan State University of Denver. "Whether it's using undocumented workers or those here legally, it's pretty large."

4. Finally, nearly nine million people are now receiving social security disability checks. When unemployment checks run out, some people (nearly a quarter) shift to this other source of income (discussed here). This is certainly an important program, but it's amazing how many people get "injured" while they are on unemployment. The improving labor markets did reduce the growth rate of this group, but the number of people on disability continues to increase much faster than the population growth.

Source: SSA

Whether it's the spouse, the underground economy or the federal government providing the income, there is "life" after the unemployment checks stop coming. Meanwhile, the "official" labor participation rate keeps falling.

Friday, April 26, 2013

In spite of all the recent stimulus talk, Bank of Japan continues to battle deflation.

NY Times: - Deflation remains firmly entrenched in Japan, figures showed Friday, as the central bank projected that its targeted level for inflation was still some years off, underscoring that there are no quick fixes for one of the world’s largest economies.

Prime Minister Shinzo Abe, who took office last December, has made the fight against deflation — the damaging fall in prices, profits and wages that has dogged Japan for most of the past 15 years — a main part of his economic policy. He pressed the central bank to commit to a target of 2 percent annual inflation, considered by many economists a healthy level.

The yen strengthened by over a percent today, driven mostly by weak US first quarter GDP reading of 2.5% (vs. 3.1% expected). But this yen strength is unlikely to persist. Given Japan's deflationary pressures and the government's commitment to address the situation, the BOJ will press the pedal on monetary expansion. And in a race against the Fed, the BOJ is ultimately expected to "win" (see discussion). It's only a matter of weeks before USD/JPY breaks above 100 as the yen continues to march along its weakening trend.

The concept of US housing shortage (discussed here) is difficult to fathom, but people who are on the transaction side of the housing business are beginning to take notice.

Bloomberg: - Wells Fargo Chief Executive Officer John Stumpf said there aren’t enough homes for sale in some markets and that a rebound in sales, prices and construction will bolster future earnings.

“If anything today there’s probably a shortage of housing on the market,” Stumpf, 59, said on a conference call today. “It’s not true in every market and in every price range but when I’m out talking with Realtors and customers, the amount of supply, especially in the lower end or starter houses, there’s not a lot of supply out there.”

The various demographics-based data such as homes for sale as a fraction of working age population (below) clearly supports this assessment.

Source: The ISI Group

This demand is starting to have an effect on US housing starts, which are still at relatively depressed levels but are showing signs of life.

Given the improvements in housing starts, where are all the new construction jobs?

Ignoring the various seasonal adjustments (which are fairly unreliable in this sector), the raw data shows construction job openings above 2009 levels but by no means on a major growth trajectory.

Similarly, the 2013 trend in the overall residential construction jobs in the US is not materially different from other post-crisis years. The chart below includes 2006 to put hings in perspective.

Source: US Department of Labor (NSA)

It seems that some construction firms have been operating with enough slack to absorb new construction orders without a great deal of additional hiring. As the peak construction season approaches however, it remains to be seen if this post-crisis pattern of weak hiring changes substantially.

Wednesday, April 24, 2013

As France and Germany PMI measures converge on the rest of the Eurozone and with the area as a whole in a contraction mode, it is becoming increasingly clear that the ECB is likely to ease monetary policy further.

Markit: - Activity fell sharply again in both manufacturing and
services. While the former saw the steepest rate of
decline for four months, the latter saw the downturn
ease slightly compared with March.

New business fell for the twenty-first successive
month, with the rate of deterioration accelerating for
the third month in a row to signal the steepest
decline since December. Marked falls were seen in
both manufacturing and services.

Some have been hoping that the ECB will follow the Fed, the BOJ, and the BOE into the brave new world of QE on an unprecedented scale. The probability of such action is quite low however because the ECB does not have the dual mandate of the Fed and (for now) is only focused on price stability. The ECB also may hold back on buying periphery debt until/unless the nations request "assistance".

Even if the central bank commences some bond buying, it is unlikely to be large and would probably end up being sterilized. Nevertheless in preparation for this easing action by the ECB, yield hungry investors bought sovereign bonds across the board. Italian and Spanish yields dropped to the lowest level since 2010.

In an economy that may be close to becoming deflationary, the drive for yield seems to override sovereign risks. This move in yields is especially remarkable given that less than a year ago the Spanish banking system was teetering on collapse (see post).

As discussed back in September (see post), the hysteria over sovereign CDS (SCDS) within the European Commission and other governing organizations has been completely overblown. Sovereign CDS has been more of a "canary in a coal mine", while EU politicians, bureaucrats, and often the public would sometimes prefer that the world does not know that their "sovereign canary" has died.

The IMF recently came out with a report confirming that much of the regulatory madness governing SCDS within the EU is unproductive. And a big part of the regulatory effort has in fact focused on the wrong risks.

IMF: - ... the evidence here does not support the need to ban purchases of naked SCDS protection. Such
bans may reduce SCDS market liquidity to the point where these instruments are less effective as hedges and
less useful as indicators of market-implied credit risk. In fact, in the wake of the European ban, SCDS market
liquidity already seems to be tailing off , although the effects of the ban are hard to distinguish from the influence of other events that have reduced perceived sovereign credit risk. In any case, concerns about spillovers
and contagion effects from SCDS markets could be more effectively dealt with by mitigating any detrimental
outcomes from the underlying interlinkages and opaque information. Hence, efforts to lower risks in the over-the-counter derivatives market, such as mandating better disclosure, encouraging central clearing, and requiring the posting of appropriate collateral, would likely alleviate most SCDS concerns.

As much as we all were fascinated by the Greek CDS settlement, in the bigger scheme of things it was a non-event (see post). Once again it's worth pointing out that CDS is not insurance and operates more like a futures contract with margin calls taking place long before there is an event.

Also it's important to note that with all the fears of systemic risks, sovereign CDS represents only around 1% of the daily trading volume of the credit default swaps market - which is completely dominated by corporate CDS.

Source: DTCC Deriv/SERV

Moreover, most of this trading volume is in the various index CDS such as iTraxx and CDX. And those products are not materially different from index futures which we all know and love. So for those who like to pontificate on the evils of the sovereign credit default swaps markets (and this includes the European Commission), please get your facts straight.

Tuesday, April 23, 2013

The "spring slowdown" is here again. As discussed earlier (see post), the previous three years saw a strong start in the US, followed by a slowdown in economic activity, particularly in manufacturing.

What's especially troubling this year is that we are also seeing a corresponding slowdown in other major economies that were thought to be in good shape, namely Germany ...

Source: Markit

... and China.

China Manufacturing PMI (source: HSBC, Markit)

Treasury yields declined to the lowest level this year in response. This move reflects the bet that given the soft patch in the economy, the Fed will continue buying government paper for some time to come.

Monday, April 22, 2013

The recent outperformance of US natural gas over crude oil has been quite spectacular - some 25% just since the beginning of March-2013.

Source: Ycharts

As usual, we want to understand the fundamentals behind this divergence. Natural gas of course is primarily used for power generation and heating in the US, while crude oil demand is driven by other, more global factors. We've discussed the recent weakness in crude oil earlier (see post). The strength in natural gas on the other hand has been impacted by two key developments.

1. The warm winter of 2011-2012 caused a large build in inventories, which ended up weakening natural gas prices. In areas like the Northeast however (and some other regions that rely on natural gas for heating), the warm weather pattern has been reversed this past winter.

Source: Rutgers University

2. Faced with a glut of gas in storage and protracted price weakness, energy firms such as Chesapeake Energy have curtailed production - as can be seen in the recent trend of rig count.

Source: Baker Hughes

That has led to declining amounts of gas in storage, which has reached levels that are more consistent with historical averages ...

Source: EIA (blue = latest gas in storage for lower 48 states)

... and pushed natural gas prices comfortably above $4/mmBtu.

Source: Barchart

These higher prices will now halt and possibly reverse the declines in gas rig count and spur more activity in natural gas production. It may take some time to get to a balanced state, given the rapid changes in the US gas industry (see discussion). The oil-gas relative divergence however has likely played out its course for now.

Sunday, April 21, 2013

Investors are fleeing dollar-based money market funds. After the spike in cash holdings from taxable income "harvesting" at the end of 2012 (see discussion), the assets in money funds have declined sharply.

Source: ICI

What's causing this decline? The common explanation has been a major rotation into equities. That certainly explains some of it, but there is more to the story. Some institutional investors are becoming uneasy about the impending money market funds regulation. Not only are investors paid a near zero rate on their money market holdings, they also may be subject to some NAV fluctuations in the near future. Furthermore, the NAV fluctuations may only be applied to funds holding commercial paper and not to those holding just treasury bills or treasury repo.

Reuters: - Two-tier money market fund reform is as clear as mud. The U.S. Securities and Exchange Commission is trying again to regulate these mutual funds, which compete with bank deposit accounts. But the rules could favor funds that invest in government debt over those buying corporate debt.

The SEC isn't talking specifics, but Larry Fink, chief executive officer of BlackRock, is. He told analysts this week that some funds may have to adopt a floating net asset value (NAV) - a standard in the mutual fund industry but anathema to those running these accounts that invest in short-term debt. That's because investors, who view money market funds as higher-yielding savings accounts, could actually lose money if NAV is no longer pegged to $1 per share. But the scheme is the best option floated by regulators who want to stop 2008-like runs from happening again. It's simple and puts risk back where it belongs: on investors.

But, according to Fink, it seems a floating NAV may not be applied to funds that invest in government debt like U.S. Treasuries. In a letter to regulators last December, BlackRock argued these funds, which represent 45 percent of the $2.5 trillion market, should be exempt. After all, they weren't part of the panic in 2008, which forced the government to bail out the industry with a blanket guarantee.
...
It's not clear why there need to be two sets of rules for money market funds, other than the need to get a deal done. The effort to reform money market funds has been a long slog. And the SEC has already failed once to overhaul the industry. Compromise may be necessary, but it shouldn't come at the expense of sensible regulation.

The whole attraction of money market funds has been the stability of principal. But with this type of regulatory risk, investors may be better off moving cash into short-term bond funds or ETFs. If one is going to be subject to volatility, why not hold money in something like the PIMCO Enhanced Short Maturity Strategy ETF (MINT), yielding 75bp. That's in contrast to PIMCO's Institutional Money Market Fund (PMIXX) which pays precisely zero, while its NAV may drop below par.

Not surprisingly, that's precisely what investors have been doing. In March short-term bond mutual funds and ETFs have clocked the largest inflow since 2009.

Source: JPMorgan

One unintended consequence of this shift to bond funds will be perturbations in some measures of money supply. Money market funds traditionally have been included in certain broad measures of money stock (such as MZM) while bond funds have not. The definition of "cash equivalents" have now been blurred further. Just watch certain high-profile economists in the next few months mistakenly interpreting this "rotation" as a slowdown in the growth of US money supply.

Saturday, April 20, 2013

Dear Attorney General Holder, Secretary Donovan, and Mr. Smith:
I am extremely concerned over reports that banks continue to violate the rights of homeowners and the terms of the National Mortgage Settlement (NMS). As a condition of the NMS, participating banks agreed to ensure certain basic consumer protections in exchange for legal relief. However, while the banks have been relieved of that legal uncertainty, struggling homeowners continue to face a seemingly patchwork system that leaves them at risk of losing their homes.
A recent survey of housing counselors in my own state of California found widespread violations of the NMS. Among the most troubling findings of the survey, which was conducted by the California Reinvestment Coalition, large majorities of counselors reported that despite the settlement’s requirements, the largest banks still frequently were failing to:

Provide borrowers with a Single Point of Contact who was accessible, consistent or knowledgeable;

Stop the foreclosure process while borrowers were negotiating in good faith for a loan modification – a practice known as dual tracking; or

In addition, the survey found that the banks continue to lose documents and improperly deny borrowers the assistance they seek to stay in their homes. These violations have meant that California homeowners – especially those in the most vulnerable populations – still are not receiving the assistance they need to stay in their homes, causing unnecessary harm to families, neighborhoods, and the state's economy.
I strongly urge you to investigate the violations reported in this survey and to hold the banks accountable by taking strong enforcement actions. Too many Californians already have lost their homes unnecessarily during the foreclosure crisis due to bank malfeasance or error. It is essential that you take swift action to ensure that the banks are meeting their obligations under the terms of the settlement and that struggling homeowners receive the assistance they need.Sincerely,
Barbara BoxerUnited States Senator

What some politicians fail to realize is that all of a sudden banks are overwhelmed with the mortgage volumes they have to process and service. The mortgage servicing arms of banking organizations these days operate with severely reduced staff levels and are simply being overrun by new loans heading their way. Dealing with delinquencies and mortgage modifications becomes challenging when departments are facing sharply higher volumes.

Source: DB

This pressure is forcing banking organizations to curtail mortgage volumes they are able to service. As a result, non-banking organizations are expected to take on an increasing role in servicing US mortgages. Not having to deal with the same degree of political and regulatory pressure, non-bank mortgage servicers are starting to ramp up. Smaller, more nimble, and not as concerned about their image or the Dodd Frank rules, these firms are expected to take advantage of the situation and grab market share.

Thursday, April 18, 2013

A confluence of recent events has been pressuring emerging countries' equity markets. Over the past couple of years emerging and developed markets have been moving in lockstep, but the two have diverged recently.

Source: JPMorgan

What's behind this underperformance in emerging markets stocks? It seems that a number of simultaneous developments has contributed to the sell-off:

1. The spectacular decline in shares of Apple has put downward pressure on some of its Asian suppliers and related technology firms.

3. The emerging strength of Japan's exporters due to rapid yen devaluation (see post) is hurting the regional competitors, particularly in South Korea. The KOSPI index is down over 6% year-to-date.

4. The recent violent commodity sell-off especially in metals and energy is pressuring commodity producers such as Russia. Russia's export sector is a one-trick pony, except for some arms sales and a sprinkle of IT services. That's why with oil sharply lower (see post), the Russian stock market is down 13% year-to-date. Other commodity exporters, from Brazil to South Africa, got hit as well.

5. Negative economic surprises in the US are not helping. The US index of leading economic indicators and the Philadelphia Fed Survey both disappointed today. As discussed, the US has entered its fourth year of seasonal spring slowdown (see post). Expectations of weaker demand from the US are hurting emerging market indices.

Bloomberg: - Emerging-market stocks dropped to the lowest level in almost five months as Apple Inc.'s Asian suppliers retreated on speculation sales are slowing and concern grew that the global economy is faltering.

Brazil’s Bovespa index rebounded from a nine-month low, as Gol Linhas Aereas Inteligentes SA jumped 11 percent.
The MSCI Emerging Markets Index fell 0.4 percent to 997.33 in New York, the lowest level since Nov. 28. Stocks joined losses in the U.S. equity market as data on leading economic indicators and Philadelphia-area manufacturing trailed estimates. Earlier this week, the International Monetary Fund trimmed its global growth forecast.

“It’s global, very much like a cold that seems to be going around,” Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $380 billion, said by phone. “Earlier in the year, the macro data was on a more reliably upward trajectory. Now there appears to be a moderation going on.”

Japan's "Merchandise Trade" exports surprised to the upside this morning. All of a sudden Japan's export activity is picking up steam.

Source: Econoday

CNN: - Japan has posted its narrowest trade deficit for nine months, helped by a big rise in the value of shipments to the US, which has toppled China as Japan's number one export destination.

Provisional figures released on Thursday by Japan's finance ministry showed that overall exports rose 1.1 per cent in March from a year earlier to Y6.3tn ($64bn)...

Very little has changed over the past few months in Japan's product and service offerings or in the way the nation's companies market their products. The yen however is down nearly 14% against the dollar this year alone. And in this price sensitive global economy 14% makes a great deal of difference. It didn't take long for Japan to be rewarded for its currency devaluation policy.

Moreover, it is clear from the nation's stock market performance relative to global equity markets (chart below) that currency wars can be quite effective and profitable if aggressively executed. Other nations (particularly in the region) are clearly watching and are likely to "retaliate" by devaluing their own currencies.

Wednesday, April 17, 2013

Staying with the theme of bearish sentiment in commodity markets, crude oil came under severe pressure recently. Based on today's data, US crude inventory actually declined last week, surprising some forecasters who expected crude stocks to continue rising. One would expect lower inventories to result in higher prices, but that did not occur.

Source: EIA

Instead WTI futures took a 2% hit today, reaching a 10-month low.

May WTI futures

Here are some of the explanations from market participants for these violent moves to the downside:

2. Major commodity investors such as hedge funds have been unwinding positions.

3. Today we saw what could amount to weaker than expected demand for gasoline in the US, as more drivers stay home.

EIA: - Over the last four weeks, motor gasoline product supplied has
averaged over 8.4 million barrels per day, down by 3.3 percent from
the same period last year.

4. The non-OPEC crude oil production, particularly out of North America continues to surprise. The Deutsche Bank chart below, showing North Dakota's oil production, is giving some long oil investors a pause for concern (in some cases nightmares).

Source: DB

DB: - The latest production data out of North Dakota, home to the
prolific Bakken shale, reflects the strength of US production as output hit a
record 780kbd in February after dipping in January as cold weather hindered
operations. Production in the state is up nearly 40% YTD. According
to Lynn Helms, Director of North Dakota’s Department of Mineral Resources,
the state is likely to reach 800kbd in May once weather conditions improve.
Helms also said the state is on track to reach production of 850kbd by early
2014. We note that if North Dakota’s production averages about 800kbd this
year, which would be up from last year’s average production rate of 663kbd,
this would be equal to over 70% of non-OPEC’s estimated total supply growth
for this year, according to the IEA.

All this is good news from the Fed's perspective, giving the central bank incremental room for monetary expansion. It's unclear where the Fed-induced bubble will show up, but for now it's not in commodities.